Warren Buffett, fondly known as the Oracle of Omaha, is widely considered to be the world’s best investor.
Over the past seven decades, he has accumulated a fortune of nearly $100bn by investing in the stock market. He’s also created hundreds of billions of dollars in value for other investors with his conglomerate Berkshire Hathaway.
Over the past few decades, Buffett’s investment strategy has changed. As his wealth has grown, he has been forced to abandon the value strategy he used to create his initial millions. Instead, he has switched to a more quality-focused investment style.
The reason he has had to make this change is quite simple. He just has too much money. Berkshire’s equity portfolio is now worth more than $200bn, which means it needs to invest tens of billions of dollars in each position to make it worthwhile.
That being said, on several occasions in the past Buffett has said that if he were working with less money, he would still be buying cheap small caps. On that basis, I think if the Oracle of Omaha were starting out today, and had only £5,000 to invest, he would be fishing for bargains in the small-cap arena.
Fishing for small caps
Buffett wouldn’t be buying any old small caps. I think he would be on the lookout for high-quality companies that had fallen on hard times.
He would most likely completely ignore small-cap mining stocks and firms with a lot of borrowing. In his early years, he also avoided companies with lots of intangible assets on the balance sheet. He wanted hard assets that could be sold off and the cash returned to investors.
According to my research, there are a handful of companies that fit these criteria right now. Some examples are aircraft leasing business Aviation, which is currently trading at a price to tangible book value (PT/B) of just 0.95; property development group U and I, which is dealing at a PT/B of just 0.5; Industrial group Lamprell (PT/B of 0.6); and Arbuthnot Banking (PT/B of 0.8).
If these Buffett-style small caps are too risky for you, I think there are several large caps he might also be interested in today. One of these is Unilever. Berkshire previously was part of a joint venture that wanted to acquire this Anglo-Dutch consumer goods group but ultimately failed.
Some real estate investment trusts also might attract Buffett’s attention right now.
These include the UK’s largest listed REIT Landsec. Shares in this business are currently dealing at a discount of around 30% of the underlying tangible net asset value.
So that’s how I think Buffett would invest £5k today. I reckon he would be looking to buy a basket of undervalued small caps with turnaround potential. He might also be interested in some high-quality large caps, at the right price.
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Rupert Hargreaves owns shares of Landsec, Unilever and Berkshire Hathaway. The Motley Fool UK owns shares of and has recommended Unilever. The Motley Fool UK has recommended Landsec. The Motley Fool UK owns shares of and has recommended Berkshire Hathaway (B shares). The Motley Fool UK has the following options: long January 2021 $200 calls on Berkshire Hathaway (B shares) and short January 2021 $200 puts on Berkshire Hathaway (B shares). Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.